winterspeak.com

Thoughts on human interaction over the next 25 years

Thursday, August 14, 2014

IRS says Bitcoin is not a currency

The IRS says bitcoin is not a currency. The IRS is correct. The IRS is also, incidently, the institution that would signal that bitcoin was a currency when it begins to accept bitcoin as payment to extinguish the very same tax obligations that it has the sovereign power to create.

Fiat currency is a manifestation of sovereign power. It comes fundamentally from the power to tax. States which are ineffective at taxing also find themselves operating in mixed currency regimes as the locals bolster their local units with land, gold, US$, and now perhaps Euros as well.

Recognizing the fiat currency is a manifestation of sovereign power makes many people uneasy, particularly those who have a suspicion of Government and do not with to trust it with something as important as a currency. I sympathize with that position, but it is what it is.

I've also heard arguments that the historical record does not show, in general, currency evolving via initial taxation, but I think that's looking at the picture too narrowly. The origins of money came from debt, where individuals did favors for each other and became indebted. Various tokens then became acceptable substitutes for extinguishing that obligation. The State puts the cap on this process by both generating the obligation, and the means of extinguishing it.

But sadly, treating Bitcoin as property makes it less likely that
Bitcoin will become a medium of exchange in the US. That’s because
consumers and business don’t normally transact in property. It would be a
massive pain to keep track of “cost basis” and “sale price” for every
dollar you received and parted with in the course of a day, week, or
month. The good news is that because Bitcoin is “programmable money”, it
is possible to do this programmatically for consumers and the companies
providing payment infrastructure for Bitcoin are slowly but surely
doing just that. However, in the long run, it would be much better for
the IRS to treat Bitcoin as a currency, and my hope is they will do that
as soon as possible.

He's looking at this in the wrong way because the "store of value" vs "medium of exchange" is not the right way to understand money. So when Fred says:

An even more problematic issue for Bitcoin is VAT tax policy in
countries where that is the norm. Right now, Canada is considering
applying VAT tax to the purchase of Bitcoin. VAT can be as high as 15%
in Canada, so that would mean every purchase of Bitcoin would cost up to
15% more than the current market price. And then when you turn around
and purchase something with Bitcoin (as I did yesterday with seats for
Tuesday night’s Met game), you would be taxed another up to 15% on that
transaction. That’s double taxation which, in my mind, is always
terrible tax policy. If Canada goes with this approach, it is my view
that Bitcoin as a medium of exchange in Canada is a non-starter.

For Bitcoin to be a medium of exchange in Canada, the Canadian Government would need to accept Bitcoin instead of the Loon for taxes. The Canadian Government can print Loons as and when it pleases. It has not control over Bitcoin. Why would it hand over it's sovereignty? More importantly, why would Canadians, if they understood what fiat currency is and how it works, want their Government to do this? It means Canada cannot operate fiscal policy. If I was a Canadian citizen, regardless of whatever reservations I may have over a particular administration, I would want the Government to be able to run counter-cyclical fiscal when necessary or else risk becoming like Greece.

Fred, who has invested in Bitcoin, then encourages the rest of the world to give up their Sovereign powers over currency and increase the risk of Greece like Depressions with all the coincident social ills that that brings. But he does not see this because he thinks the frame of the conversation is "medium of exchange vs store of value" and that's not his fault.

So, contra Fred:

It is my view that treating Bitcoin like a financial asset is the most helpful approach. That would allow Bitcoin to find its best use cases while having to operate under the same legal and regulatory regimes that the rest of the financial world operates under already. We need good financial innovation that serves the public, not regulatory arbitrage which enriches the financial sector. Bitcoin is not a currency, it is a protocol, and the sooner it realizes that the sooner we can see the innovation we all hope for. Those who confuse it with a currency are consigning their population to a financial catastrophe which will take us back to the Great Depression, while ironically blocking the technological advances it promises.